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Copyright and Public Good Economics: a Misunderstood Relation

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Copyright and Public Good Economics: a Misunderstood Relation COPYRIGHT AND PUBLIC GOOD ECONOMICS: A MISUNDERSTOOD RELATION † CHRISTOPHER S. YOO The conventional approach to analyzing the economics of copyright is based on the premise that copyrightable works constitute pure public goods, which is generally modeled by assuming that such works are nonexcludable and that the marginal cost of making additional copies of them is essentially zero. These assumptions in turn imply that markets systematically produce too few copyrightable works and underutilize those that are produced. In this Article, Professor Christopher Yoo argues that the conventional approach is based on a fundamental misunderstanding. A close examination of the foundational lit- erature on public good economics reveals that the defining characteristic of pub- lic goods is the need to satisfy an optimality criterion known as the “Samuelson condition,” which suggests that the systematic bias toward underproduction is the result of the inability to induce consumers to reveal their preferences rather than nonexcludability and zero marginal cost. Reframing the analysis in terms of the Samuelson condition also expands the number of ways in which the as- sumptions underlying pure public goods can be relaxed. In so doing, it sug- gests that markets for copyrighted works are more properly analyzed as impure public goods. Unlike markets for pure public goods, markets for impure public goods exhibit no systematic bias toward underproduction and are not bounded away from providing efficient levels of utilization. The insights of impure pub- lic goods theory thus have broad implications for a wide range of copyright- related issues, including fair use, duration, compulsory licenses, database pro- tection, digital rights management, and derivative works. † Professor of Law and Director of the Technology and Entertainment Law Pro- gram, Vanderbilt University Law School. I would like to thank participants at work- shops conducted at the University of Michigan Law School and the Vanderbilt Univer- sity Law School, as well as John Conley, Andy Daughety, Paul Edelman, Gerry Faulhaber, James Gibson, Paul Heald, Bob Inman, Mark Lemley, Glynn Lunney, Kris- ten Madison, Ted Parsons, Adam Pritchard, Bob Rasmussen, Jennifer Reinganum, Chris Sanchirico, Polk Wagner, and Joel Waldfogel, for comments on earlier drafts of this Article, and Catherine Sloan and Daniel Burks-Goodman for their research assis- tance. Financial support from the Vanderbilt Dean’s Fund is gratefully acknowledged. All errors are my responsibility. (635) 636 UNIVERSITY OF PENNSYLVANIA LAW REVIEW [Vol. 155: 635 INTRODUCTION......................................................................................637 I. THE CONVENTIONAL APPROACH TO APPLYING PUBLIC GOOD ECONOMICS TO COPYRIGHT ............................................................643 A. Nonexcludability.............................................................................644 B. Nonrivalry as Zero Marginal Cost ...................................................645 C. Applications of the Conventional Approach to Specific Copyright Doctrines........................................................................................650 1. Fair Use.....................................................................................650 2. Duration ...................................................................................652 3. Compulsory Licenses ...............................................................653 4. Database Protection .................................................................654 5. Digital Rights Management .....................................................655 6. Derivative Uses .........................................................................656 D. The Analytical Shortcomings of the Conventional Approach..............659 II. THE SAMUELSON CONDITION AS THE TRUE FOUNDATION OF PUBLIC GOOD ECONOMICS..............................................................662 A. The Baseline Case of Private Goods..................................................662 B. Pure Public Goods ..........................................................................665 C. Critique of the Conventional Approach.............................................671 1. A New Perspective on Nonexcludability .................................671 2. A New Perspective on Nonrivalry as Zero Marginal Cost .......672 3. The Proper Scope of Price Discrimination.............................673 III. THE THEORY OF IMPURE PUBLIC GOODS ........................................675 A. The Economics of Congestion...........................................................678 1. A Basic Description of the Economics of Congestion ............678 2. The Applicability to Copyright ................................................683 B. Spatial Competition ........................................................................687 1. A Basic Description of Spatial Competition............................688 2. The Policy Implications of Spatial Competition for Copyright..................................................................................693 a. The Feasibility of Promoting Optimal Access...............................693 b. The Feasibility of Optimal Incentives.........................................696 3. Potential Limitations to Spatial Competition .........................704 IV. T HE POLICY IMPLICATIONS OF APPLYING IMPURE PUBLIC GOODS THEORY TO COPYRIGHT...................................................................706 A. Fair Use .........................................................................................707 B. Duration........................................................................................708 C. Compulsory Licenses .......................................................................709 D. Database Protection.........................................................................710 E. Digital Rights Management ............................................................711 F. Derivative Uses...............................................................................711 CONCLUSION..........................................................................................714 2007] COPYRIGHT AND PUBLIC GOOD ECONOMICS 637 INTRODUCTION Scholarship on the economics of copyright has been dominated by the assumption that copyrightable works are pure public goods.1 The most frequently cited definition of pure public goods focuses on two characteristics. First, pure public goods are nonexcludable, in that producers cannot provide their benefits to one consumer without si- multaneously providing the benefits to other consumers. Second, pure public goods are nonrival, in that the consumption of the good by one consumer does not reduce the supply available for consump- tion by others.2 Nonrivalry is generally modeled by assuming that the marginal cost of making an additional copy of a copyrightable work is zero.3 These assumptions imply that markets provide insufficient in- 1 See Ben Depoorter & Francesco Parisi, Fair Use and Copyright Protection: A Price Theory Explanation, 21 INT’L REV. L. & ECON. 453, 465 n.4 (2002) (calling the assump- tion that copyright is a pure public good “part of the collective wisdom of mainstream economic analysis”). For the seminal statement tying intellectual property to the the- ory of pure public goods, see Kenneth J. Arrow, Economic Welfare and the Allocation of Resources for Invention, in THE RATE AND DIRECTION OF INVENTIVE ACTIVITY: ECONOMIC AND SOCIAL FACTORS 609, 614-16 (Nat’l Bureau of Econ. Research ed., 1962). For leading examples within the copyright literature, see Stephen Breyer, The Uneasy Case for Copyright: A Study of Copyright in Books, Photocopies, and Computer Programs, 84 HARV. L. REV. 281, 281 (1970); William W. Fisher III, Reconstructing the Fair Use Doctrine, 101 HARV. L. REV. 1659, 1700-05 (1988); Wendy J. Gordon, Fair Use as Market Failure: A Structural and Economic Analysis of the Betamax Case and Its Predecessors, 82 COLUM. L. REV. 1600, 1610-11 (1982); William M. Landes & Richard A. Posner, An Economic Analy- sis of Copyright Law, 18 J. LEGAL STUD. 325, 326 (1989); Mark A. Lemley, The Economics of Improvement in Intellectual Property Law, 75 TEX. L. REV. 989, 994-99 (1997). For over- views of the economics of pure public goods, see RICHARD CORNES & TODD SANDLER, THE THEORY OF EXTERNALITIES, PUBLIC GOODS, AND CLUB GOODS 143-239 (2d ed. 1996); William H. Oakland, Theory of Public Goods, in 2 HANDBOOK OF PUBLIC ECONOM- ICS 485, 486-99, 502-22 (Alan J. Auerbach & Martin Feldstein eds., 1987). Of course, a wide range of noneconomic justifications for copyright also exist. See generally William Fisher, Theories of Intellectual Property, in NEW ESSAYS IN THE LEGAL AND POLITICAL THEORY OF PROPERTY 168, 170-73, 184-94 (Stephen R. Munzer ed., 2001). I leave extended discussion of copyright’s noneconomic aspects to other work. See Christopher S. Yoo, Copyright and Democracy: A Cautionary Note, 53 VAND. L. REV. 1933, 1953-63 (2000) (critiquing democratic theories of copyright). 2 See R.A. Musgrave, Provision for Social Goods, in PUBLIC ECONOMICS: AN ANALYSIS OF PUBLIC PRODUCTION AND CONSUMPTION AND THEIR RELATIONS TO THE PRIVATE SECTORS 124, 126-29 (Julius Margolis & Henri Guitton eds., 1969). 3 For illustrative examples, see Yochai Benkler, An Unhurried View of Private Order- ing in Information Transactions, 53 VAND. L. REV. 2063, 2066, 2070, 2078 (2000); James Boyle, Cruel, Mean, or Lavish? Economic Analysis, Price Discrimination
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